First take: Omicron reaction, Fed remarks

Chief Market Strategist Troy Gayeski shares his initial thoughts on the omicron reaction and Fed remarks

Troy A. Gayeski
November 30, 2021 | 3 minute read
  1. The recent development of the new omicron variant of COVID-19 has clearly injected volatility into capital markets and could modestly reduce economic growth and add a bit more inflationary pressure as labor market supply is further constrained.
  2. One should certainly be humble about making any bold predictions about the impact of omicron on the economy and markets. The emergence of yet another variant further enhances the argument that investors should focus on diversifying their directional risks in favor of alternatives.
  3. The new major negative development for markets today was the statement by Fed Chairman Powell that not only should the term “transitory” be dropped when describing inflationary pressures, but that the Fed will be actively considering reducing their quantitative easing policy at a more rapid rate.
  4. We believe a faster taper is more of a capital market concern than an economic one. However, as we have stated in our recent white paper on money supply growth, one of the biggest risks to markets next year is the inevitable drop in money supply growth as quantitative easing (QE) is wound down and the Fed ultimately hikes rates. A faster wind down of QE could put downward pressure on money supply growth as early as the second quarter of 2022.
  5. Historically, a less accommodative Fed followed by outright tightening never goes well for markets because the Fed always gets what they want: Reductions in money supply growth always leads to tighter financial conditions (lower equity multiples, for instance) in order to constrain inflationary pressures. Hoping that this time is different is a bad strategy. Thus, the urgency to diversify into alternatives received another boost today courtesy of the Fed.

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Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

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Troy A. Gayeski, CFA

Chief Market Strategist

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